This would just be the state abbreviation (e.g. AL, CA, NY, FL, etc.) of the state where you received tax-exempt interest. This information is usually included in supplemental information sent with your 1099-DIV.
If you know which state paid the interest, select it from the "drop-down" menu.
If you don't know which state paid the interest, you can select "More than One State", the last option on the drop-drown menu.
(If you do not have a drop-down menu, enter "XX" for "More than One state").
